7. Share-based Compensation

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 7 - Share-based Compensation

The fair value of share-based payments made to employees and non-employee directors was estimated on the measurement date using the Black-Scholes model using the following weighted average assumptions:

	Three Month Period Ended				Six Month Period Ended
	June 30,				June 30,
	2012		2011		2012		2011
Risk free interest rate		0.76%		––		0.80%		2.25%
Dividend yield		0.0%		––		0.0%		0.0%
Expected term (in years)		7		––		6.5		6.0
Volatility		104.95%		––		103.12%		93.0%

Management applies an estimated forfeiture rate that is derived from historical employee termination data.  The estimated forfeiture rate applied for the three month periods ended June 30, 2012 and 2011 was 7.89% and 9.37%, respectively.

The following is a summary of stock option activity for the six month period ended June 30, 2012, and the status of stock options outstanding at June 30, 2012:

	Six Month Period Ended
	June 30, 2012
				Wtd. Avg.
				Exercise
	Shares			Price
Outstanding at beginning of year		17,873,227		$	0.08
Granted		2,200,000			0.09
Exercised		––			––
Forfeited		(325,000	)		(0.07	)
Outstanding at June 30, 2012		19,748,227		$	0.09
Stock options exercisable at June 30, 2012		11,654,156		$	0.09

The weighted average fair value of options granted was $0.07 and $0.07 per share for the three  and six month periods ended June 30, 2012, respectively. There were no options granted during the quarter ended June 30, 2011. Weighted average fair value of options granted was $0.06 per share for the six month period ended June 30, 2011.

As of June 30, 2012, there was $173,638 of aggregate intrinsic value of outstanding stock options, including $104,927 of aggregate intrinsic value of exercisable stock options.  Intrinsic value is the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on June 30, 2012.  This amount will change based on the fair market value of the Company’s stock.

We recorded stock compensation expense of $50,925 and $53,242 for the three month periods ended June 30, 2012 and 2011, respectively, and $97,613 and $131,870 for the six months ended June 30, 2012 and 2011, respectively, as follows:

	Three Month Period Ended				Six Month Period Ended
	June 30,				June 30,
	2012		2011		2012		2011
Research and development costs	$	7,119	$	7,693	$	13,487	$	18,126
Sales and marketing costs		210		663		210		1,525
General and administrative costs		38,523		42,406		75,822		103,099
Cost of goods sold		5,073		2,480		8,094		9,120
Total	$	50,925	$	53,242	$	97,613	$	131,870

As of June 30, 2012, we had approximately $371,401 of unrecognized compensation expense related to unvested stock options.  We expect to recognize this compensation expense over a weighted average period of approximately 2.30 years.